Design/methodology/approach – This paper complements previous studies by examining investment inflows into Canada through the lens of Dunning’s eclectic OLI framework.

Findings – This paper finds that location advantage and institutional assets are the most important factors in the decision of American firms to invest in the Canadian automotive Industry, with the USMCA trade-agreement playing a particularly important role.

Practical implications – This paper provides the Canadian government and automotive industry with a clear understanding of the attractiveness of their side of the market so that they are able to protect and leverage these factors effectively in the future and ensure the continued success of the industry in the coming years.

Originality/value – This paper enriches the research on the Canadian automotive industry at large and provides unique insight into its relationship with the United States through a first-of-its-kind analysis using an established and trusted framework.

Keywords: Canada, United States, Investment factors, Eclectic paradigm, Automotive industry

INTRODUCTION

The following paper is an analysis of the factors that influence American companies to invest in the Canadian automotive industry. This is important in the current era as global trends such as those caused by COVID-19 and increased protectionism threatens to finally break many longstanding relationships such as the one between the American and Canadian automotive industries. Specifically, one of the catalysts for the subject of this paper (which will be outlined in further detail in a later section) was the recent implementation of the emergency act by the Canadian government to be able to maintain trade across the border of an automotive industry cluster. What was immediately apparent from articles and testimony on the subject was that this was done almost entirely under threat of the US withdrawing investment from the Canadian side of the border. Apparently, the cross-border relationship in this industry had already begun to be strained over the last few years with this recent event nearly becoming a breaking point. With such drastic action being taken to maintain this relationship, it is important to ask ourselves what else can be done to improve or maintain it and is it even possible to fix anymore. One of the best ways to do this is to investigate the historical factors that contribute to this relationship so that maybe these bonds can be further strengthened over time and a crisis like this can be avoided in the future.

For the Canadian government, this issue is important as losing this relationship would mean the loss of many jobs, as well as a lot of economic capital. This is important for the United States and other countries as well, as it will clarify the benefits that can be found in the Canadian automotive industry and some of the reasons why it might make sense to invest in it.

LITERATURE REVIEW

Over the course of my research for this paper, I have come across many studies that analyze the Canadian and American automotive industries separately (White, 1983) (Perry, 1982) (Dykes, 1970). Often, they will have a section or two that goes into the relationship briefly as well, but rarely is it the primary focus of the paper. Furthermore, in the studies that do analyse the relationship, it will often be in the context of a specific trade agreement (many of which are now outdated as of the transformation from NAFTA to the USMCA) (Wilton, 1976) (Beigie, 1970) (Kumar, 1993) (Johnson, 1993) (Anderson, 1983) (Doh, 1998) (Holmes, 2004) (Fuss, 1986). Finally, some go over the relationship generally but, in a scope, much larger than just the automotive industry (Rugman, 1990) (Ford, 1981) (Crookell, 1983) (Cowan, 1972). I have found that these reports are the best and the closest to answering my research question but since the generalized nation-to-nation factors are not the same as the industry-specific factors, it is nonetheless important to look at the automotive industry separately.

The paper which can be said to be the closest to my own is “Government, foreign direct investment and the Canadian automotive industry” by Greig Mordue (Mordue G. , 2007). At over 350 pages in length, this paper is by far the most comprehensive look at the topic to date. Although an extremely thorough analysis of the FDI in the Canadian automotive market in general, it can be said to fall into the category of those papers which neglect the specific relationship with the United States. As with those previously mentioned papers, Mordue refers to the US throughout his report, but he doesn’t focus on it. Instead, in the sections where it mentions the US, Mordue chooses to use the United States as a point of comparison for Canada, contrasting both its production capacities as well as its market. Of course, this is still useful information, but it means that it cannot adequately answer my research question. Secondly, although Mordue does provide some degree of factor analysis, his paper looks more at the Canadian automotive market, rather than from the perspective of any country in particular (in this case, ideally the United States). Additionally, although referencing several, Mordue does not appear to consistently apply any established FDI framework to structure this analysis which makes some of his analysis somewhat confusing coming from a traditional FDI perspective. Mordue also has a subsequent paper about FDI in the Canadian automotive market (Mordue G. , 2010) but since it is largely a historical analysis of a specific time period and I therefor feel that his previous work is more relevant to this paper.

It is not the intention of this paper to compare the Canadian industry to other countries from the perspective of US firms, but rather to understand the specifics factors of the Canadian auto industry independently. This is primarily done due to the variety of other macro factors that are difficult to control for when comparing one entire nation to another on an industry scale. Since the literature review has shown that this a relatively unexplored area of study, it might be best to start out with a smaller scale study will leave room for further academics to build off. As a result, this paper will focus exclusively on the Canadian automotive industry and American foreign investors as the two macro actors of this analysis.

MODEL

This paper will be conducted using the OLI model. Also sometimes known as the eclectic model, this method was first introduced by John H. Dunning in 1979 as an expansion of the older internalization theory (Dunning, 1979) (Buckley & Casson, 1976). The purpose of internalization theory is that it is a way to understand how internalization can be a competitive advantage for companies, specifically in the field of Foreign Direct Investment. Three years later, Dunning builds off this theory to create his own model. Dunning’s new theory not only includes internalization as a crucial firm advantage, but also ownership and location. Adding these two extra elements, Dunning’s model allows researchers to gain a much more detailed and holistic perspective on the factors that contribute to a firm’s decision to commit to foreign direct investment in a specific market.

In the end, the model consists of ownership advantage, location advantage, and internalization advantage. Furthermore, ownership advantage can be broken up into three separate sections known as ownership assets, transactional advantage, and institutional assets. With these elements, Dunning theorized that this framework would be well suited to exposing the factors that comprise a firm’s decision to commit to foreign direct investment in a location. Since its initial publication, Dunning’s original paper has been cited over 1500 times, cementing itself as a staple of the field.

The reason this paper will be using this model is because it is the framework that is able to best explain the action that occurs in these markets. Other frameworks such as the GVC model or Imbalance theory add additional elements that can be useful in some cases. However, in the case of this paper, the eclectic model best fits the important factors in this relationship without adding any convoluting details.

After much research, I was able to construct two main research questions on which I will basing this paper. The first is “what are the factors that have historically led American FDI to the Canadian automotive industry?” and the second: “what can Canada do to retain American FDI in the Canadian automotive industry?”. Over the course of this paper, I hope to be able to provide answers for both questions as thoroughly and objectively as possible with the information that is publicly available at the time of writing this paper.

METHODOLOGY

This paper will be following a case approach using the single case of Canada. Data is unfortunately difficult to come by in this area. As a result, hard data will be used where possible, but it will take a largely supporting role to a more quantitative analysis. Sources for this paper will largely be from official government organizations but may in some cases rely on secondary analysis (especially in cases where the original data is inaccessible for whatever reason).

RESULTS The model begins with ownership advantage. As mentioned in the methodology section, Dunning’s model further divides ownership advantage into three parts: the ownership asset (Oa), the transactional advantage (Ot), and the institutional asset (Oi). In general, none is more important than the other.

Beginning with the ownership asset, companies generally prefer to own their assets as it allows them more control and larger rewards if things work out in the way they would like them to. Generally, companies prefer to own more assets in safe, predictable environments that they understand since these can be seen as relatively low risk. Conversely, when investing in industries that the parent company has less familiarity with or isn’t as confident in the business environment, they may choose to invest in ways that reduce their ownership and therefor hedge their risk if things go wrong. In the case of Canada, it doesn’t appear that clear trends emerge one way or another, however this may be unsurprising as data on this subject is generally lacking due to small sample sizes and frequent censorship due to corporate investment privacy laws (Biesebroeck J. V., 2006) (Bureau of Economic Analysis, 2018) (Bureau of Economic Analysis, 2021) (Canada, Gross domestic product (GDP) at basic prices, by industry, monthly, industry detail, 2022).

The next piece is the transactional advantage. In the Case of Canada, there are several reasons why American investment into Canadian industry would be beneficial from a transactional advantage perspective. One of the main reasons is simply due to geography. Although shipping costs have been significantly reduced in recent years, the simple facts of geography remain. Physical distance and proximity in trade routes will always provide some degree of advantage. Furthermore, these relationships are extremely old, tried, and true. Although there are numerous historical agreements that together define the trade relationship between the US and Canada, the USMCA is the current most important agreement (Executive Office of the President of the United States, 2020). While the agreement does include Mexico, for the purposes of this paper, the agreement’s impacts will only be observed from the perspective of Canada and the United States. In this case, the agreement essentially designates that cross-border trade should be as cheap and free as possible. Other notable provisions regarding the automobile industry include “rules of origin” provisions. These have been changed several times over the years, however the current form states that for an automobile to qualify for preferential duty-free treatment, over 75% of its value must have been created within the borders of the agreement. Additionally, 45% of that must be created by workers who earn over 16$ an hour. This final clause essentially excludes Mexico as their wages are nowhere close to that level which means that the source of this labour must come from either the United States or Canada (OECD, 2022). This fact, combined with the quotas laid out in the agreement (2.6 million Canadian vehicles) mean that US companies have a lot of incentive to work very closely with the Canadian automotive industry. The incentives if these companies are able to pull this off include massive reductions in taxes and fees that are required to be payed on the vehicles. Naturally, the USMCA therefor has a large impact on the transaction cost decisions that are made by US firms. This agreement allows companies to be confident in the stability of the US-Canada relationship and provides incentives for continued cooperation. By having equity in companies on both sides of the border, these companies are able to take advantage of the transaction cost reduction for both sides of the agreement. Further transaction cost reductions come from more standard factors such as the reduction in search and information due to the high level of familiarity and similarity between the markets. Decreased bargaining and decision costs due to similar legal processes between the countries as well as the ownership advantage. Finally, policing and enforcement on things like broken contracts is made very simple due to the high level of cooperation between the countries’ legal systems as well as the strength of both justice systems independent of each other (Ford, 1981).

The final aspect of ownership advantage is institutional assets. One of the important aspects of institutional assets is culture. For Canada and the US, culture is one of the most unifying aspects of their relationship. According to Sociologist Seymour Lipset, in many ways Canadian and American culture is nearly indistinguishable (Lipset, 1990). There are few countries in the world that experience such a degree of cross-border cultural homogeny. This makes it extremely easy for US workers and executives to acclimatize to working in the country and significantly reduces costs for employee training or implementing unique enforcement mechanisms.

The next element of the OLI paradigm is locational advantage. This refers to the advantages incurred due to the specific location chosen. In this case, there are many reasons why American firms would choose to invest in the Canadian automotive industry. For example, Canada has one of the most highly educated labour forces in the world. This means that it is an ideal place to export some higher value-added tasks. Even in manufacturing, it might be advantageous to have a higher educated population working on more technical aspects of the value chain. Additionally, there is a large presence of natural resources along with a healthy resource processing industry in Canada. This means that many materials can be locally sourced which saves costs and allows for better quality assurance. The most important aspect of location advantage however, are the local cross-border cluster that have built up. This has been noted in several previous papers (Biesebroeck J. V., 2006) (Mordue G. , 2007) (Fuss, 1986). The largest of these clusters can be found between Windsor Ontario and Detroit Michigan. Both of these cities were essentially built due to the automotive industry (Ryan, 2012). There has been a longstanding history of cooperation between the cities which has led to a high degree of interconnectedness and an extremely high concentration of automotive-related resources across both sides of the border. Even though the North American automotive industry has seen better days in the distant past, this location continues to be attractive for firms with many new plants still being built and new automotive related firms being established frequently.

An example of the importance of this cluster relationship was demonstrated in the former half of 2022. During this time, the Ambassador Bridge, which is the main connecting point between Windsor and Detroit, was blocked by Canadian protesters attempting to fight against COVID-19 and vaccine mandates which had been put in place by the Canadian government (Tarnowski, 2022). Although this is not the first border blockade Canada has experienced, the action that was taken against it was wholly unprecedented. In response to the single bridge blockade, the Canadian government decided to activate the Canadian Emergency Act; an act which grants the government special powers which would otherwise violate standard government procedures. In the act, it states that it is explicitly intended to be used in times of extreme national crisis such as during war. This was the first time this act had been activated since its adoption into Canadian law in the 1980s, making its activation completely unprecedented. Canadian government officials responsible for its activation have since testified that the bridge blockade necessitated the activation since the cross-border cluster was so important for both the Canadian and American economies that its continued blockage could irreparably damage the relationship between the two nations (CPAC, 2022). There may be something to that. According to the mayor of Windsor via CBC, on an average day, the bridge carries $360 million of cargo back and forth across the border (CBC, 2022). That accounts for 25% of Canada-US goods trade. It remains to be seen what the results of the hearings on the government’s decision will be but the fact that drastic action of that scale was taken to preserve a cross-border cluster of this industry has concretely proven its importance to scholars who have been theorizing on the subject for decades.

The final aspect of the OLI paradigm is internalization advantage. This refers to the advantages that a company can gain through internalization. In other words, the advantages from keeping operations within the company. In terms of the American investment in the Canadian automotive industry, the internalization advantages come in three parts: cost reduction, risk reduction and efficiency increases. In terms of cost reduction, American firms can save money by investing in the Canadian market to gain more control over their own supply chain. This can save money through general transaction costs such as by eliminating the need for contracts to be drafted with additional companies. In terms of risk reduction, the COVID-19 pandemic has demonstrated to many companies the importance of control over one’s own supply chain as many companies were left stranded when their former partners and suppliers shut down due to the pandemic. By internalizing as much of the operation as possible, companies can minimize the risks associated with working with companies which are fully independent from one’s own. Finally, efficiency increases can occur due to several factors such as enhanced communication, coordination, flexibility, and general control. It is understandable why, when American companies have such an incentive to work with the Canadian industry already, that they would choose to actively internalize as much of those cross-border processes as possible.

DISCUSSION

Overall, this paper has discovered several never-before seen insights into the Canadian automotive industry as it appears to American investors. From the beginning, it was clear that free trade agreements, both historical, and current, are massive catalysts for growth withing this industry between these two countries. The USMCA is clearly one of the largest drivers of growth in the relationship. The recent reshuffling of this relationship hopefully is an indication of further cooperation down the road. Although I couldn’t include Mexico in the paper, its influence on the agreement cannot be understated. As was seen in the example with the $16 an hour quota, the influence having a country with significantly different labour conditions helps establish certain niches for the roles each country fills.

There are several interesting policy implications that can be drawn from this paper. For the Canadian government, it’s clear from the Ambassador Bridge fiasco that their relationship with US investment in this industry is extremely important to them. On a slightly unrelated note, it seems like the Emergency Act could benefit from having a more democratic activation process to avoid a controversy of this scale from arising next time its use is required. Other considerations might be to continue to prop up the clusters that already exist in the country to avoid future job loss.

CONCLUSION

In the end, this paper was able to successfully outline the essential factors that go into the decision of American firms to invest in Canada. Although all factors are important, strong trade agreements, coupled with cultural homogony, and a locational geography that has created strong cross-border clusters can be seen as the most important factors for American companies. Before this paper, previous studies had demonstrated the attractiveness of general Canadian industry to the US, as well as the attractiveness of the Canadian automotive industry in general, however these two pieces have never before been combined. In the end, this paper is a final product that may be able to assist the Canadian government in continuing to attract investment, US firms in evaluating the Canadian market, and even competing markets which may be interested in attempting to position themselves as competitors by making themselves appear more attractive in these or other areas.

While I’m confident this paper has done a satisfactory job at outlining the attractive factors in the Canadian automotive market, there is undoubtedly room for further research. For instance, one of the limitations of this study is that it examines Canada’s industry alone (as well as the US’s investments to some extent). Neither of these countries exist in a vacuum. With the modern global economy, there is fierce competition around every corner. Future studies would be able to take advantage of this by leveraging the results of this paper as a basis for comparison to a potential competitor to the Canadian automotive industry. Keeping with the United States as the primary foreign investor, Mexico might be the first one that comes to mind but there are plenty of other markets that could be potential competitors, they would all just involve different balances of factors.

Adding onto the previous idea, it might also be possible to build off this paper by examining how these factors change as the weight of these factors changes for investing countries. For example, things like the Covid-19 pandemic couldn’t be included in this project due to the limited amount of data available due to its recency.

Another difficulty with the paper was that it was sometimes difficult to find relevant data. In general, it was possible to find a version of everything that was needed. However, the variety of sources that had to be drawn upon for this to be possible was somewhat disconcerting. It seems either the Canadian or American government should have the specifics of this relationship very clearly layed out for the public, however at times this simply wasn’t the case, mainly to protect the privacy of the firms involved.

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